Penny Stocks 5 Ways To Spot A Pump-And-Dump Scam Penny Stocks 101 – 5 Things You Need To Know Before You Begin Trading

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Penny Stocks 101 – 5 Things You Need To Know Before You Begin Trading

Pump and Dump Scams Are Becoming More Sophisticated and Harder To Recognize

You are probably familiar with the basic concept of a pump and dump scam. A scamster(s) buys up a bunch of worthless penny stock. Then they “pump” it (another way of saying hype it) and dupe people into believing it is a stock they should rush out and buy based on the rumor they are speading. As more and more people buy into it, the price goes up of course, based on simple supply and demand. The price is now artificially inflated because the real value of the stock hasn’t changed. Then, after the price has risen substantially, they “dump” it (sell it) and rake in their ill-gotten profit. Very quickly after they sell, the stock price usually plummets and most investors don’t get out in time because no one wants to buy their shares.

The basics of the pump and dump are an old scam. However, there are many variations and scamsters are becoming increasingly sophisticated in how they pump a worthless stock. Our federal SEC (Security Exchange Commission) is always trying to keep up but it is hard to do. One of the latest variations is for a room full of “telemarketers” to call and pretend to call the wrong number and leave messages where they are pretending to leave their friend a hot stock tip. They’ll generate thousands upon thousands of these messages which can really drive up the interest (and price) in a particular stock.

Many scamsters have also learned not to employ more subtle tactics. Instead of using “in your face” language and blatantly touting a penny stock, they just drop a few hints in passing and then let the rumor snowball from there. This has proven to be a very effective way of spreading a false rumor about a stock it can be quite difficult for people to realize what is actually going on before it’s too late. These types of rumors even get picked up by the press at times.

It Matters Where a Penny Stock Is Trading

The SEC defines a penny stock as any stock that is trading at less than $5/share. Other people put the cut-off lower saying that a penny stock is any stock that trades lower than $1/share. Either way, “penny stocks” can trade on any of the boards. Even the very reputable New York Stock Exchange (NYSE) can host a penny stock from time to time, although if the company stays in that territory for a long time they’ll likely get booted off the NYSE. It is common for the NASDEQ to host several penny stocks as does the AMEX. However, when most people think of penny stocks, they tend to think of stocks that trade on the bulletin boards (OTCBB) or the pink sheets where things aren’t as tightly regulated.

Most investors new to trading penny stocks know that stocks that trade on the NYSE, NASDEQ, and the AMEX have more requirements to list on these boards, and therefore, more is known about the fundamentals of these companies. However, what many new investors don’t realize is that there is a HUGE difference between a penny stock trading on the OTCBB versus the pink sheets. The OTCBB is actually owned by the NASDEQ and it has many more requirements for a stock to list on it than do the pink sheets which have virtually no requirements.

Now, fraud can occur with a stock listed on any board and the chance of this occurring with a stock listed on the OTCBB is higher than with stocks listed on the NYSE, NASDEQ, and AMEX. However, I want to emphasize to you that the potential for fraud is FAR GREATER for a stock listed on the pink sheets than on the OTCBB – there is a very substantial difference. You should always take this into consideration before you make any trade. You should be particularly wary of any stock trading on the pink sheets. So, keep your antennae up!

Trading Volume Really Matters and I’ll Tell You Why

If you are trader used to trading stocks that are hosted on the NYSE, NASDEQ, and AMEX, you may be in for a rude awakening when you first start trading penny stocks on the OTCBB and pink sheets. The volume for these stocks is understandably lower than for stocks trading on the bigger boards. However, sometimes the volume can get so low that it prevents you from selling a stock when you need to, i.e. you can easily get stuck with a stock that is heading south in a hurry and you can’t unload it. So, be wary of any stock that is trading at a really low volume.

When “Free” Isn’t Really Free

If you Google “penny stocks” invariably you are going to come across the word “free” over and over again. You’ll see lots of offers for sign up for “free penny stock picks” and many invitations to trade your email for a “free newsletter” which promises to give you “insider tips.” What I have learned is that “free” is never really free with it comes to these offers.

First of all, if you actually follow any of this advice, you will most likely end up losing your entire investment – if not on the first trade, within the first few. Consider yourself lucky if you break even or don’t lose more than 20%.

Second, it is important to consider the cost of reading all this stuff that isn’t going to pan out. It’s costs you time and sometimes it costs you in terms of the stress and elevated cortisol levels when you see your investments disappear.

An Easy Way To Make Profitable Trades

I started making good money with penny stocks (and much more than I ever made in the stock market before I traded penny stocks) when I learned the best way to find the really good deals was to purchase premium picks from real experts. Keep in mind that only some of these services provide picks that will make you a lot of money – and they are not always from the people you first expect would be the best. I’ve learned that it takes skills similar to those you find in a really good investigator reporter to get the kind of information you need to pick the best penny stocks and this isn’t something you learn in school! Some people just have that uncanny ability to sniff out the right information. To find which of these picks are the best, you should always test the services you try in a test account before you use real money.

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